NOTE: This disposition is nonprecedential. 

## United States Court of Appeals for the Federal Circuit

2007-5052, -5097

SACRAMENTO MUNICIPAL UTILITY DISTRICT, Plaintiff-Cross Appellant,

v.
UNITED STATES, Defendant-Appellant.

Timothy R. Macdonald , Arnold & Porter LLP, of Denver, Colorado, argued for plaintiff-cross appellant. With him on the brief were David S. Neslin , of Denver, Colorado, and Howard N. Cayne , of Washington, DC. Alan J. Lo Re , Senior Trial Attorney, Commercial Litigation Branch, Civil Division, United States Department of Justice, of Washington, DC, argued for defendant-appellant. With him on the brief were Jeanne E. Davidson , Director, Harold D. Lester, Jr. , Assistant Director, and Joshua E. Gardner and Scott R. Damelin , Trial Attorneys. Appealed from: United States Court of Federal Claims Judge Susan G. BradenNOTE: This disposition is nonprecedential. 

## United States Court of Appeals for the Federal Circuit
2007-5052, -5097 SACRAMENTO MUNICIPAL UTILITY DISTRICT, Plaintiff-Cross Appellant,

v. UNITED STATES Defendant-Appellant.

Appeal from the United States Court of Federal Claims in Case No. 98-CV-488, Judge Susan G. Braden.

___________________________ DECIDED: August 7, 2008

___________________________ Before MAYER, LOURIE, and RADER, Circuit Judges

. RADER, Circuit Judge

. This appeal is one of many arising from a longstanding contra ct dispute between the nuclear power industry and the Government. It represents the third in a trio of cases addressing the damages owed to the nati on’s nuclear utilities because of the Government’s failure fulfill its contractual obligation to accept and dispose of the utilities’ radioactive waste. See Yankee Atomic Elec. Co. v. United States , No. 2007-5025 et al. (Yankee II ), Pac. Gas & Elec. Co. v. United States , No. 2007-5046 (PG&E II ).Sacramento Municipal Utility District (SM UD) originally brought this action seeking damages to compensate for the cost of storing spent nuclear fuel (SNF) and high-level radioactive waste (HLW) beyond the time that the Government promised, by contract, to begin storing that waste in a permanent and secu re repository. Finding that the Government’s breach was a substantial fa ctor in SMUD’s decision to complete its dry storage facility, the Court of F ederal Claims awarded SMUD $39,796,234 in damages. Sacramento Mun. Ut il. Dist. v. United States , 74 Fed. Cl. 727, 735 (2006) (SMUD II ). Because the Court of Federal Claims did not assess damages according to the rate at which the Government was cont ractually obligated to accept the utility’s waste, and because that court erred in allo wing the Government to deduct a number of offsets from the amount owed to SM UD, this court reverses and remands. I. The general factual background of the c ontracts and circumstances surrounding the SNF cases appears in the trial court’s opi nion and earlier opinions by this court. See Sacramento Mun. Util. Dist. v. United States , 70 Fed. Cl. 332, 336-56 (2006) (SMUD I ); see also Me. Yankee Atomic Powe r Co. v. United States , 225 F.3d 1336, 1337-40 (Fed. Cir. 2000). Accordingly, this opinion will only discuss the facts necessary for an understanding of the issues in this appeal. SMUD, a California public utility, owns the Rancho Seco nuclear power plant. SMUD shut the plant down in 1989 in response to a voter referendum. At that time, SMUD had 493 SNF assemblies onsite in a wet poo l. In light of this closure, SMUD sought to decommission Ranch Seco, and thereby reduce its “nuclear footprint.” SMUD I , 70 Fed. Cl. at 340.

2007-5052, -5097 2Consistent with the Nuclear Waste Polic y Act of 1982 (NWPA) (codified at 42 U.S.C. §§ 10101-10270), SMUD (like all of the nation’s nucle ar utilities) entered into a contract (the Standard Contra ct) with the Department of Energy (the Department or DOE) on June 14, 1983. Underthat contract, SMUD paid ap proximately $40 million into the Nuclear Waste Fund (NWF). In return , the Department agreed to begin acceptance and disposal of SNF and HLW fr om SMUD (and all of the other utilities) on January 31, 1998. The Department did not ti mely perform. In fact, the Department has yet to begin performance. Indeed, ev en though the contract obligated the Department to take title to and dispose of all of SMUD’s SNF and HLW, it has yet to accept even a single canister of radioactive waste. As a result, SMUD has been forced to continue storing its SNF and HWL onsite at Rancho Seco. The Department’s failure to perform beginn ing on January 31, 1998 constituted a partial breach of the contract. See Me. Yankee , 225 F.3d at 1343; see also Ind. Mich. Power Co. v. United States , 422 F.3d 1369, 1376-77 (Fed. Cir. 2005). The parties in this appeal dispute the amount of dam ages owed to SMUD for that breach. The Government appeals because the trial court did not construct and refer to a non-breach world in calculating damages. Specifically, the Government complains that the trial court did not use the contractual acceptance rate to develop a non-breach scenario. Thus, according to the Governmen t, the trial court did not evaluate whether SMUD would have pursued dual-purpose dry storage even if the D epartment had timely performed. Discernment of SMUD’s motivation in constructing such a facility is complicated by factors unrelated to t he breach—namely, SMUD’s interest in decommissioning the plant after the voter refer endum and its desire to minimize storage

2007-5052, -5097 3expenses even in a non-breach scenario. Another important inquiry is whether the precise method of mitigation SMUD used—i.e., dual-purpose dry storage, rather than simple dry storage—must hav e been reasonably foreseeable to the Department at the time of contract formation. This court must also decide to what extent SMUD is entitled to recover costs for internal labor used in mitigating the Government’s breach, and whether the Government is entitled to a de duction for costs related to storage of NonFuel Components. II. This court reviews contract interpretation as a question of law without deference. Winstar v. United States , 64 F.3d 1531, 1540 (Fed. Ci r. 1995) (en banc), aff’d , 518 U.S. 839 (1996). Evidentiary rulings receive review for an abuse of discr etion. Flex-Rest, LLC v. Steelcase, Inc. , 455 F.3d 1351, 1357 (Fed. Cir. 2006) (citing Gen. Elec. Co. v. Joiner , 522 U.S. 136, 141-43 (1997)). A trial court’s selecti on of a causation standard likewise “depends upon the facts of the particular case and lies largely within the trial court’s discretion.” Citizens Fed. Bank v. United States , 474 F.3d 1314, 1318 (Fed. Cir. 2007). As in Yankee II , the Government’s primary cha llenge on appeal relates to the Court of Federal Claims’ choice and applicat ion of the substantial factor causation standard. As this court explai ned in that case, “A lthough the substantia l factor test is not preferred, this court has refrained from reversing tria l courts that have applied the substantial factor test in Winstarand SNF cases.” Yankee II , No. 2007-5025 et al., Slip Op. at 5 (citing Citizens Fed. , 474 F.3d at 1319; Ind. Mich. , 422 F.3d at 1373).

2007-5052, -5097 4Accordingly, this court will not infringe up on the trial court’s discretion to use the substantial factor test. License to use the substant ial factor test, however, sh ould not be mistaken for permission to ignore the burden of proof required under that test. To prove causation under the substantial factor test, “[SMUD] had the burden to prov e the contractual acceptance rate and apply that rate before suggesting that the Government’s breach was a substantial factor in c ausing [SMUD’s] claimed expens es. The trial court had the obligation to hold [SMUD] to that burden.” Yankee II , No. 2007-5025 et al., Slip Op. at 6. The importance of this ob ligation is underscored by the factual quandary presented in this case. The Court of F ederal Claims found that “until May 14, 1997, SMUD’s decision to authorize expenditures fo r ‘dual-purpose’ dry storage was made for business reasons, and that the Government ’s subsequent January 31, 1998 breach of the Standard Contract was not a substantial causal factor in that decision.” SMUD I , 70 Fed. Cl. at 365. In contra st, the trial court credited ev idence that SMUD’s May 15, 1997 decision to proceed with its dual-purpose dry storage facilit y, “despite delays, cost overruns, and the bankruptcy of a major contra ctor,” was made in anticipation of and substantially caused by the Depar tment’s partial breach. Id. The difficulty with the distin ction drawn by the Court of Federal Claims, however, is that the court made this determination without explicitly discerning the rate at which the Department would have ac cepted SMUD’s waste in a non-breach world. Such analysis is particularly importa nt where, as here, plaintiff claims that but for the defendant’s breach, a once prudent busine ss decision would have been abandoned

2007-5052, -5097 5because unforeseen circumstances rendered it economically ill-advised in a non-breach world. Indeed, the testimony relied upon by the trial court illustrates the necessity of first identifying a timetable—i.e., rate—for a cceptance of spent fuel by the Department. The Court of Federal Claims gave great weight to the te stimony of Rancho Seco plant manager Steven Redecker, who had responsibi lity for analyzing SMUD’s radioactive waste storage options and whose May 15 , 1997 recommendation prompted SMUD to proceed with its dry storage project. Mr. Redecker testified that his analysis presupposed that the Department would have removed all of SMUD’s SNF and HLW by 2006 in a non-breach world—i.e., at an overa ll rate of approximately 3,000 MTU per year (from all utilities). “Had they been performing and sayi ng, yes, we're coming in 1998 and that fuel will be gone by 2006, that w ould have changed the outcome of this entirely. It would have made the spent fu el pool an absolute certainty.” SMUD I , 70 Fed. Cl. at 364-365. Thus, as in Yankee II , even though the trial court attempted to dodge the contractual acceptance rate question, the c ourt implicitly relied on such a rate in rendering its decision. As this court stated in Yankee II , In the absence of an express acceptance rate, this court lacks any means to evaluate the soundness of the Cour t of Federal Claims’ contract interpretation. In any event, an a cceptance rate based on assumption and approximation is not enough to support a finding of causation under the substantial factor test. In sum, the trial court had an obligation to determine the SNF and HLW acc eptance rate under the Standard Contract and apply that rate in dete rmining the substantial cause of the [utility’s] costs. Yankee II , No. 2007-5025 et al., Slip Op. at 7. In this appeal’s other companion case, PG&E II , the Court of Fe deral Claims did conduct an analysis to set an acceptance rate. In reviewing that case, this court

2007-5052, -5097 6interprets the Standard Contract as requiri ng the Department to accept SNF and HLW in accordance with the 1987 annual capacity report process. PG&E II , No. 2007-5046. Accordingly, this court vacates and remands wit h instructions that the Court of Federal Claims apply the Standard Contract a cceptance rate identified in PG&E II to assess causation. III. The trial court, after finding that the Government’s breach was a substantial factor in SMUD’s decision to construct a dry storage facility, also found that the use of dual-purpose dry storage canisters in that fac ility was not permissible pre-breach mitigation. SMUD I , 70 Fed. Cl. at 362; Sacramento M un. Util. Dist. v. United States , 74 Fed. Cl. 727, 730 (2006) (SMUD II ). Designed for dry stor age, dual-purpose canisters facilitate safety and transportation because they reduce the number of times fuel must be handled. For example, other canister types require transfe r to a wet pool or through a dry transfer before th ey can be transported. In analyzing whether SMUD was entitled to recover costs affiliated with the development and implementatio n of its dual-pur pose dry storage system , the Court of Federal claims found that “[t]here is no ev idence in the record, however, that the Government anticipated or was aware on June 14, 1983 that any breach of the Standard Contact might require t he Government to be responsible for the cost of ‘dualpurpose’ dry storage.” SMUD I , 70 Fed. Cl. at 362. On a motion for reconsideration, the trial court reiterated this finding: “SM UD’s decision to utilize ‘dual-purpose’ dry storage was ‘not reasonably foreseeable bythe Government on June 14, 1983.’” SMUD II , 74 Fed. Cl. at 730 (citations omitted). This holding misapprehends the

2007-5052, -5097 7requirements of the foreseeabilit y prong of the substantial factor causation test, and is therefore reversed. Pre-breach mitigation damages are avail able to plaintiffs who can prove foreseeability, causation, and reasonableness. Ind. Mich. , 422 F.3d 1375-76. Although the Government challenged the reasonableness of SMUD’s clai m, the Court of Federal Claims found that such damages were not a llowable because the use of dual-purpose storage canisters was unfor eseeable at the time of contracting. SMUD I , 70 Fed. Cl. at 347. But the law does not require that th e specific method of mitigation be foreseeable. Rather, the foreseeability pro ng applies to the type of loss, not to the means of mitigation. See Citizens Fed. Bank v. United States , 474 F.3d 1314, 1321 (Fed. Cir. 2007) (“If it was foreseeable that the breach would cause the other party to obtain additional capital, there is no requirement that the particular method used to raise that capital or its consequences also be fore seeable.”). That the method of mitigation which, in hindsight, appears most reasonab le and appropriate was not used should not preclude recovery. Indeed, to rule otherwise would contradict the incentives of the mitigation doctrine altogether. See PG&E I , 73 Fed. Cl. 333, 419 n.71 (2006). Accordingly, the Court of Federal Claims’ finding that the use of dual-purpose storage canisters was not foreseeable at the time of contract formation was clearly erroneous and is reversed. See Bluebonnet Savings B ank v. United States , 266 F.3d 1348, 1355 (Fed. Cir. 2001) (“Foreseeability is a question of fact reviewed for clear error.”). The Court of Federal Claims announced, without elaboration, a second ground for rejecting SMUD’s claim for damages aris ing from the cost of its dual-purpose

2007-5052, -5097 8canisters in its decision on SMUD’s motion fo r reconsideration. “In addition, ‘SMUD's decision to utilize ‘dual purpose’ dry storage was unreasonable.’” SMUD II , 74 Fed. Cl. at 730 (citations omitted). This court also reverses that unsubstantiated finding. “When mitigating damages from a breach, a party ‘must only make those efforts that are fair and reasonable under the circum stances.’” Home Savings of Am. v. United States , 399 F.3d 1341, 1353 (Fed. Cir . 2005) (quoting Robins on v. United States , 305 F.3d 1330, 1333 (Fed. Cir. 2002)); see also 11 Corbin on Contracts § 57.11, at 311 (2005 ed.) (“The doctrine of avoidable consequences merelyrequires reasonable efforts to mitigate damages.”); 3 Dobbs: Law of Remedies § 12.6(1), at 1 27 (2d ed. 1993) (“[T]he damage recovery is reduced to the ex tent that the plaintiff c ould reasonably have avoided damages he claims and is ot herwise entitled to.”). It is the Government’s burden to show that it was unreasonable for SMUD to pursue dual- purpose storage canisters to mitigate the Government’s breach. See Old Stone Corp. v. United States , 450 F.3d 1360, 1370 (Fed. Cir. 2006). The Government has not met its burden. SMUD was not alone in the development or use of dual-purpose stor age. The use of dual-purpose storage canisters is near universal in the industry. Indeed, the Government did not even appeal the Court of Federal Claims’ award of damages to compensate for the costs of dualpurpose storage in Yankee II and PG&E II . Yankee II , No. 2007-5025 et al.; PG&E II , No. 2007-5046 Moreover, the Department and the Nuclear Regulatory Commission actually aided SMUD in its effo rts to develop and implement th is technology. In light of the circumstances surrounding SMUD’s dual-purpose storage e fforts, the trial court’s summary dismissal of those efforts as unr easonable is clearly erroneous and cannot

2007-5052, -5097 9stand. Thus, this court reverses the deter mination that SMUD’s pre-breach mitigation activities were unreasonable. Causation, the remaining pre-breach mitigation factor, presents more difficulty for SMUD. As explained in Section II above, the trial court must applythe contract rate when assessing causation under the substantial factor test. Thus, this court must remand as to causation. In particular, the Court of Federal Claims must apply the Standard Contract acceptance rate in evaluat ing the Government’s partial breach of contract as a substantial factor in causing SMUD to pursue dual-purpose storage. IV. The Court of Federal Claims also reje cted SMUD’s claim for reimbursement of internal labor costs incurred as part of its mi tigation efforts. In particular, SMUD sought $13,812,040 in compensation for the time 256 of its employ ees charged to the dualpurpose dry storage project. In support of its request, SMUD presented evidence “detailing the percentage of hours that each SMUD employee charged to [the] ‘dualpurpose’ dry storage project relative to t he total hours that each employee worked for SMUD.” SMUD I , 70 Fed. Cl. at 376. Ne vertheless, the trial court refused recovery of internal labor costs for any employee who spent less than t he majority of his time on that project. Id. Under this paradigm, the labor costs from just 16 of SMUD’s 256 employees who worked on the dry storage pr oject, totaling $4,329,532, qualified for compensation. Id. ; SMUD II , 74 Fed. Cl. at 735. Because the Court of Federal Claims erred in requiring SMUD to pr ove how it would have used it s internal labor pool absent breach by the Governmen t, this court reverses.

2007-5052, -5097 10As explained above, an inju red party can recover mitigat ion damages so long as it establishes that the claimed expens es were caused by the breach. See Ind. Mich. , 422 F.3d at 1373. As the trial court correctly noted, “[t]he fact that an injured party has used internal resources to mitigate a breach does not foreclose the injured party from recovering such costs.” SMUD I , 70 Fed. Cl. 376. Thus to recover internal labor costs incurred in mitigation of the Go vernment’s breach, SMUD must prove that it did in fact use its own employees in its mitigati on efforts, and the num ber of hours those employees spent on mitigation related projects. See, e.g. , Dunn Appraisal Co. v. Honneywell Info. Sys., Inc. , 687 F.2d 877, 883-84 (6th Cir. 1982). Upon meeting these requirements, SMUD is entitled to recover onl y those costs arising from the time its employees spent on mitigation efforts. The trial court, however, seeks to im pose an additional requirement—namely, that SMUD must demonstrate that it would have elim inated or reassigned the employees who spent time on mitigation-re lated projects to collect damages to compensate for their mitigat ion activities. SMUD I , 70 Fed. Cl. 376. The trial court’s requirement of proof of how SMUD would have employed it s labor force had it not been required to divert resources to the dry storage project is unpr ecedented. Indeed, in this case’s two companions the trial court found, and the Government di d not appeal, that the utilities were entitled to recover the cost s of internal labor on the dual-purpose dry storage projects at issue in those matters. Yankee Atomic Elec. Co. v. United States , 73 Fed. Cl. 249, 250-259 (2006) (Yankee I ); Pac. Gas & Elec. Co. v. United States , 73 Fed. Cl. 333, 399-400 (2006) (PG&E I ). Moreover, such a rule would encourage aggrieved parties to hire outside contra ctors—likely at greater expense—to perform

2007-5052, -5097 11mitigation-related work ratherthan utilize internal resour ces already familiar with the facility and its operations. See S. Nuclear Operating Co. v. United States , 77 Fed. Cl. 396 442-43 (“[T]o not allow recovery [in the SNF cases] of appropriately established costs of internal labor (assuming causatio n and foreseeability [are] established) may lead to the use of contracts to perform future mitigat ion efforts at a higher cost, a result that is neither reasonable nor prudent.”). Furthermore, the trial court’s distincti on between employees who spent a majority of their total time on miti gation-related work and those wh o did not is a false one. SMUD has requested compensation for the total number of hours its workforce spent on mitigation efforts. It does not matter if 10 employees dedic ated 100 percent of their time or 100 employees dedicat ed 10 percent of their time to mitigation work. So long as SMUD is only asking for reimbursement for the total number of hours its employees worked on mitigation projects and can prove that its employees did in fact spend that time on those projects, it is entitled to recove r. Therefore, in light of the trial court’s misapprehension of SMUD’s burden of proof, this court reverses the trial court’s grant of an offset to the Government for SMUD’s internal labor expenses. V. The Court of Federal Claim s likewise granted the Govern ment an offset for costs arising from the storage of nonfuel SNF asse mbly components. Notably, the trial court raised the specter of such an offset sua s ponte, without request from the Government. Post-Trial Hr’g Tr. 63:24-63:2, Aug. 23, 2006. In its Op inion Clarifying Judgment, the trial court reasoned: Because SMUD was decommissioning the Rancho Seco facility, nonfuel components were put into dry storage that otherwise wo uld not have been

2007-5052, -5097 12stored. See HTR 61. These nonfuel com ponents included: control rod assemblies; burnable poison rod a ssemblies; power shaping rod assemblies, orifice rod assemblies , and storage cans containing cut-up incore detectors and control rods. See PX 598A at SMUD 0028244; see also HTR 65-68. Therefore, to arrive at the correct offset, the costs of the nonfuel components must be added to SMUD's proposed offset. SMUD II , 74 Fed. Cl. at 733. Because this r easoning is factually incorrect and in contravention of the plain terms of the Standard Contract, this court reverses. Nonfuel components are “t hings that typically fit inside fuel assemblies in addition to the assembly itself” and include the elements cited by the trial cour t in its clarification opinion. Post-Trial Hr’g Tr. 65:15-24. The Standard Contract specif ically requires that the Department accept and dispose of a ut ility’s nonfuel components “as part of the spent nuclear fuel assembly”: Nonfuel Components . Nonfuel components includi ng, but not limited to, control spiders, burnable poison rod assemblies, control rod elements, thimble plugs, fission chambers, and primary and secondary neutron sources, that are contained within the fuel assembly, or BWR channels that are an integral part of the fuel assembly, whic h do not require special handling, may be included as part of the spent nuclear fuel delivered for disposal pursuant to this contract

. 10 C.F.R. § 961.11 Appx. E(B)(2) (second emph asis supplied). This provision is unambiguous: nonfuel components that are part of a fuel asse mbly are to be accepted by the Department under the Standard Contra ct. Indeed, even the Government does not dispute that “non-fuel co mponents are covered by the Standard Contract and that DOE is to accept those items along with SM UD’s SNF.” App. Reply Br. at 50. However, as the Government points out, SMUD is only entitled to collect damages related to the storage of nonfuel com ponents that it would not have had to store if the Department had performed at the contractual acceptance rate. Therefore, on remand, the Court of Feder al Claims must determine what SNF assembly storage

2007-5052, -5097 132007-5052, -5097 14 costs SMUD incurred because of the Department’s failure to accept SMUD’s waste at the contractual rate, and award damages only for that amount. The Government is not entitled to an offset for nonfuel components in assemblies that SMUD would not have had to store in a non-breach world, but SMUD is likewise not entitled to damages absent proving a causal link. VI. Mirroring SMUD’s complaints, the Government appeals the trial court’s denial of an offset to reflect the costs it asserts SMUD would have incurred had it cancelled its dry storage-related contracts in 1997. App. Br. at 42. This court detects no error in the trial court’s determination that no offset is required because SMUD would have made business decisions allowing it to avoid co ntinuing costs and obligations in the nonbreach world. See SMUD II , 74 Fed. Cl. at 734. Accordingly, the Court of Federal Claims’ denial of a such an offset is affirmed.

AFFIRMED-IN-PART , REVERSED-IN-PART and REMANDED

COSTS Each party shall bear its own costs.